Financial technology companies are increasingly looking into the possibility of getting bank charters, though few have actually taken the plunge.
Heightened regulatory scrutiny in banking-as-a-service (Baas) has fintechs taking fresh stock of their reliance on bank partners. However, if deploying deposits for lending is not core to their business models, fintechs have tended to walk away from getting their own bank charters.
"The number of inquiries we got increased, but the number of people who wanted to follow through on that has not been all that high," said Jonah Crane, a partner at advisory firm Klaros.
Inquiries spiked during the March 2023 turmoil that saw several crypto-connected banks fail, Crane said, and also picked up following recent incidents around Evolve Bank & Trust. BaaS provider Evolve and its middleware vendor Synapse Financial Technologies, Inc., which filed for bankruptcy in April, encountered issues in reconciliation that caused difficulties with distributing funds to depositors because ledger records did not match.
Regulators have been paying particularly close attention to the BaaS space as of late. Evolve is one of many BaaS providers that have received severe enforcement actions in the past 12 months. With that backdrop, some fintechs have considered bank charters to get more control over their destiny.
"In some ways, that interest has only increased with some of the recent enhanced scrutiny by the federal prudential regulators on bank-fintech partnerships," said Adam Cohen, a co-head of the financial institutions regulatory group at Skadden Arps Slate Meagher & Flom LLP.
Core considerations
Alignment with its core business, rather than uneasiness with bank partners, should take precedence when a fintech considers a bank charter, said Mark Chorazak, the other co-head of the group at Skadden.
"There must be compelling business needs to have a bank charter," Chorazak said in an interview.
A key element in the business model is the need to use deposits to reduce funding costs and maintain liquidity. UK small business lender OakNorth Bank PLC is one of the fintechs pushing full steam ahead with getting a charter as it makes inroads in the US market. It is currently searching for a US bank target and is open to other options, including a de novo bank charter application, said COO Sharon Miles.
In general, it makes sense for a fintech to have a bank charter for small business lending because of the benefit of deposits and the strong community ties in small business banking, Crane said.
All quiet
Few fintechs have been able to obtain a bank charter since 2022, according to data compiled by S&P Global Market Intelligence.
The most recent de novo application by a fintech-oriented entity was Agility Bank NA, which received the approval for the full-service charter application in July 2020 and started operations in April 2022. Houston-based Agility Bank touted its digital platform as "close to a fintech banking experience," according to its website.
Another full-service charter applicant, Battle Bank NA, received conditional approval in October 2022, but it expired in July 2024, according to the Office of the Comptroller of the Currency. One of the conditions in OCC's preliminary approval was a minimum $120 million initial paid-in capital. The OCC required the bank to raise that capital within 12 months from the approval date and start operating within 18 months, otherwise the approval would expire. Battle Bank declined to comment for this article.
Industrial loan company (ILC) charters have been another channel for fintechs to get the privilege of banks. However, there have been no ILC approvals granted to them since March 2020, when Square Financial Services Inc., a unit of payments giant Block Inc., and consumer lender Nelnet Bank, obtained an approval.
The most recent fintech-oriented bank formed by an acquisition took place in 2022, where an investor group launched BaaS provider Lead Bank by buying community bank Lead Financial Group Inc. The investor group, Luna Parent Inc., was led by former Square Financial Services executive chairman Jackie Reses, who is currently chair and CEO of Lead Bank.
Clean history
Smaller depository institutions tend to be among the most suitable targets for fintech buyers.
A de novo application requires building a capital base from scratch, so buying a bank has the benefit of starting with an existing capital base and going-concern operations. To be considered a good target for a fintech, a bank needs to be adequately capitalized and have a track record in compliance to the Community Reinvestment Act, safety and soundness principles and fair lending laws, said Max Bonici, a counsel at Venable LLP.
A clean compliance record is what OakNorth will look for in a US bank target, Miles said in an interview. OakNorth has a good relationship with its bank regulators in the UK, in part because of its disciplined credit underwriting driven by data, Miles said.
For any fintech buyers, a focus on deposits and lending on a sustained basis will make a stronger case to regulators to approve any deals, Bonici said.
"A fintech that wants to acquire a bank should probably look and walk and talk like a bank," Bonici said. "Under this administration, that will get you farther."
